Market Trend and Types |Stock Market Analysis Tutorial

What is Market Trend?

Market Trend can be defined as the overall direction of trading in the broader market on either a short- mid- or long-term basis. A trend that moves generally higher is called an uptrend, and one that moves generally lower is called a downtrend.Trends can be short- or long-term. Short term trends cycle within the broader trend, sometimes moving with it and sometimes against it. Many issues affect rises and falls in share prices, whether gradual changes or sharp spikes. The best way to understand how the market fluctuates is to study trends.

Significance of Market Trend

We all have seen how a Stock Trader buys numerous shares of a hot stock or dumps shares of a stock that has crashed or is at point of plunge. We also have seen TV commercials of many Brokerage Firms that claim to have exciting prospects and ventures and strong portfolios. And also perhaps we also have researched about a hundred different ways to predict the rise and fall of the stock market.

But the main question of how these Traders and Broker Firms predict when to buy or sell the shares, remains partially solved I would say. The truth is there is no magical or short cut way to predict the stock market behavior. There are numerous issues affect rises and falls in share prices, whether moderate changes or sharp spikes. The best way to understand how the market fluctuates is to study the market trends carefully. By recognizing a trend in the stock market or in an individual stock, we will be able to choose the best times to buy and sell.

Market Mentalities -

Before analysis of Market Trend, we must be aware of the different Market Mentalities . Market Trends can be classified into Primary & Secondary Market Trend and Secular Market Trend

Primary Market Trends -

A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more duration of time. Primary Market Trend can be sub-classified into Bull Market Trend & Bear Market Trend.

Bull Market -

Bull markets are characterized by sheer optimism, investor confidence and expectations that strong results will continue.

A Bull Market is when the market appears to be in a long-term climb. Bull markets tend to develop when the economy is strong, the unemployment rate is low, and inflation is under control. The emotional and psychological state of investors also affects the market. For example, if investors have faith that the upward trend in stock prices will continue, they are likely to buy more stocks. If there are more buyers interested in buying shares at a given price than there are sellers who are willing to part with their shares at that price, stock prices will continue to rise.

Bear Market -

Bear Markets are characterized by sheer pessimism. investor skepticism and uncertainty.

A Bear Market describes a market that appears to be in a long-term decline. Bear markets tend to develop when the economy enters a recession period, unemployment rate is high, and inflation is rising. Investors lose faith in the market as a whole, which in turn decreases the demand for stocks. Keep in mind that a sustained bear market is something that you should expect to occur from time to time, and that, in the past, the stock market has risen more than it has declined.

Secondary Market Trends

Secondary trends are short-term changes in price direction within a primary trend. The duration is a few weeks or a few months. The two types of Secondary Market Trends are Correction and Bear Market Rally.

Correction -

A market correction is a secondary or short-term stock market trend where stock prices fall 5-20% over a relatively short period of time, such as a few weeks or up to several months. Corrections are generally temporary price declines interrupting an uptrend in the market (or an asset). A correction has a shorter duration than a bear market or a recession, but it can be a progenitor to either.

Note: A bear market should not be confused with correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do.

Application - Some investors may perceive a correction as a good time to buy more shares of stocks at relatively lower prices before the bull market trend resumes. However, other investors may detect this as a new and prolonged downward trend which will continue into a full bear market trend and reduce their exposure to stocks or stock mutual funds.

Bear Market Rally -

A bear market rally is a sharp move up in the context of a larger bear market. It is actually a period in which prices of stocks increase during a bear market. A bear market rally is usually a short-lived market increase following a period of market decline and is followed by another period of market decline leading to a highly down trend. Bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and throughout the late 1960's and early 1970's. Although there are no official guidelines for a bear market rally, it is sometimes defined as an overall market increase of 10-20% during an overall bear market.

Secular Market Trends

A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.Secular markets are typically driven by large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets.

Types of Market Trends -

The direction of the trend is absolutely essential to trading and analyzing the market.